Should I buy this tenant-occupied SFR?

[Christian Hall]

Hi BP community, Looking for some advice. I currently own and manage one rental property and I’m considering purchasing the following property in the same city: 3 bed 1 bath 1,051 square feet $39,900 asking price (yes, this is a realistic asking price for this market) Homes in this area/condition can rent for around $800-$1,000 per month. It’s a low-income area, but not a bad neighborhood. I just viewed the property with my agent and it looks great. Just a few minor cosmetic concerns. All great so far! My only concern is the fact that it is tenant-occupied. The tenant is on a lease up through May of 2019 at $650 per month. Barf. I’m trying to think about the long-term gain of a great property, not the short-term loss on cash flow. I plan to make improvements to the property and raise the rent to market value ($800-$1,000) at the end of their lease. If they stay, great! If not, I’ll rent it to someone else. I’m just worried because I didn’t screen this tenant. I don’t know their background, references, or rental history. They could trash the house once they hear I plan to raise the rent. Sure, that is part of investing, but I’d love to avoid a trashed house/eviction situation if possible. This is all hypothetical, but it’s on my mind and I’d love some advice. Of course I’ll treat the tenants great and fairly, but it still has me nervous. Am I being paranoid? What would you experienced SFR investors do? Thank you so much for any and all thoughts! Christian

[Chris Sellers]

Christian,

Sounds like a good deal to me.  You need to get a copy of that lease.  Does it give you an out to raise the rent when the property changes owners?  Many leases have language that make allow them to expire if the property transfers.  If not, it might be worth working through your realtor to have the current landlord update the lease to make these changes (he can give the renter a free month to sweeten the deal if needed). 

If you can't get a lease that allows you to raise the rent when you take over, you'll need to price this 1 year loss of rental income into the purchase price and just wait it out.

I wouldn't worry about a tenant being there.  This happens all the time, risk we all take. 

Good Luck!

Chris